EBPR 0209 David by NiceTime


									VOLUME 63 ◆ NUMBER 8

Employee Benefit
 Plan Review

How a 401(k) Plan Can Affect a Merger or Acquisition
David P. Boucher

             company preparing for a merger or acquisition        Asset Purchase
             runs due diligence on the target company’s busi-        An asset purchase is the acquisition by an organization of
             ness fundamentals, client overlap, client reten-     certain business assets of another organization (for example,
             tion capability, growth models, compensation         equipment, buildings, or accounts receivable) in exchange
structures, plants, property, and equipment. What else is         for consideration such as cash or stock of the purchasing
there to cover?                                                   entity. A transaction structured as an asset purchase may or
    The 401(k) plan. Although not as complex as many              may not require that the buyer assume responsibility for the
of the upfront due-diligence steps of a normal corporate          acquired organization’s retirement plan.
action, handling a 401(k) plan properly takes some care              If the acquisition was the result of an asset sale, a
and proper planning. This article outlines some of the care       merger of the buyer’s and seller’s plans may be feasible if:
and planning necessary for a successful corporate action as
it relates to a 401(k) plan.                                      • There is a mutual agreement
    To prepare for the successful business transaction, the       • The buy/sell agreement states that the buyer and seller
401(k) due diligence team must evaluate which type of               will share in the decision making regarding the disposi-
acquisition is about to take place: stock or asset purchase.        tion of the seller’s plan.
Once this acquisition structure has been identified, the due
diligence team must understand its options as they relate to         As a quick reference, the following are the four possible
that particular type of transaction.                              solutions a buying organization has with respect to the
                                                                  seller’s 401(k) plan:
Stock Purchase
    A stock purchase is the acquisition by an organization        1. Merge the two plans into one new plan;
or individual of the stock of an organization in exchange         2. Maintain two plans separately and make continued
for consideration such as cash or stock in the purchasing            contributions to both plans on an ongoing basis;
organization. The sellers in this case are the owners of the      3. Freeze one of the plans and add the participants of the
organization being purchased. They are selling their own-            frozen plan to the other plan on a future basis; or
ership interests in the form of shares of stock and receiving     4. Terminate one of the plans and add the participants of
consideration in return.                                             that plan to the other plan on a future basis allowing
    A stock purchase typically requires that the buyer               the terminated plan’s participants to roll over their
assume responsibility for any associated qualified                   terminated plan benefits to the ongoing plan.
plans, unless those plans are terminated prior to the
close.                                                            Merging the Plans
    If the acquisition is the result of a stock sale, the buyer      Merging plans involves the consolidation of two or
will assume the seller’s retirement plan, unless the plan was     more plans into a single plan. Merging may be the best
terminated prior to close. If it is not terminated, the buyer     choice to try to reduce administrative costs, or if the buyer
may consider merging it with its own plan or maintaining          wants to create consistency, ease of administration, or
it as a separate plan.                                            simplify communications efforts.
Maintaining Separate                     also be attractive for a buyer who      are taken into account. If a buyer
Plans                                    wants to cover the acquired employ-     desires to terminate a plan under
   In this option, the retirement        ees in the buyer’s current retirement   a stock purchase, the plan must
plans of all affected organizations      plan. A frozen plan must continue to    be terminated prior to the close.
will be maintained separately. This      be subject to governmental reporting    Communication at the point of
might be the best choice:                and disclosure requirements. Frozen     close is important to relieve par-
                                         plans must also be amended to           ticipant anxiety. Finally, post-close
• To provide different benefits to       remain in compliance with changes       communication with the current
  one group in order to attract or       in laws and regulations. Finally, all   provider and the previous pro-
  retain key employees or because        participants’ vesting may need to be    vider is important. Closing out a
  the terms of a collective bargaining   brought up to 100 percent.              retirement plan properly alleviates
  agreement;                                                                     potential issues years later with
• If the acquiring organization does     Terminating the Plan                    the Internal Revenue Service and
  not want to amend its current             Under this option, the plan          the Department of Labor. A final
  program to include the protected       ceases to allow benefit accruals and    5500 is required when merging one
  benefits from the other plan;          contributions, and all of the plan’s    retirement plan into another.
• If the acquiring organization does     assets are distributed. Generally,
  not want to amend the plan to          all active participants and certain     Conclusion
  offer more generous vesting; or        terminated participants become             In closing, handling the retirement
• If the acquired organization’s plan    100 percent vested. Typically, this     benefits package during a corporate
  has potential compliance issues        option is chosen due to protected       action is not the most complicated
  that could “taint” the plan of the     benefits concerns or compliance         due diligence matter, however, docu-
  acquiring organization.                issues. Participants are allowed to     menting the process and communi-
                                         roll over their account balances from   cating it effectively can be critical
Freezing an                              the terminated plan into their new      to a successful integration of an
Acquired Plan                            employer’s plan.                        acquired organization. ❂
   Freezing a plan involves taking the      Regardless of the buyer’s choice
steps to formally discontinue con-       in handling the seller’s 401(k) plan,
tributions or cease benefit accruals     communication efforts during the                David P. Boucher, CFP®, AIF®, is
without distributing all of the plan’s   pre-close, the at-close, and the                 vice president, retirement plans,
assets. This option may be attractive    post-close periods are critical. Pre-        with Longfellow Benefits, a Boston-
for buyers that are concerned            close communication is important              based employee benefits consultant
with the compliance record of the        so the best interests of all affected       and brokerage. He can be reached at
acquired organization’s plan. It may     entities and timeliness of decisions          dboucher@longfellowbenefits.com.

          Reprinted from Employee Benefit Plan Review, Volume 63, Number 8, February 2009, pages 12–13,
                  with permission from Aspen Publishers, a WoltersKluwer Company, New York, NY
                                     1-800-638-8437, www.aspenpublishers.com.

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